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Monday, 14 November 2016

REIT listing on mind, private equity firms look to invest in malls

Private equity firms are increasingly exploring opportunities to invest in India's shopping malls as such retail assets can be listed under Real Estate Investment Trust (REIT) portfolios. GIC, Blackstone, Canadian Pension Plan Investment Board (CPPIB) and Xander fund-promoted Virtuous Retail are among those looking to expand their retail footprint, especially after India eased the rules on REITs.

"Like office market, shopping centers offer great opportunity for consolidation in India for value enhancement by leveraging management expertise and re-positioning shopping centers. The size of the market is limited and spreads across tier 1-3 cities; first mover will have strategic advantage," said Sanjay Dutt, the chief executive of India operations at Ascendas-Singbridge, a Singapore-headquartered urban and business space solutions company.

Under the rules unveiled recently by the Securities and Exchange Board of India (Sebi), REITs are allowed to invest in under construction assets to hold up to 20% stake, doubling the previous cap.

This will allow for more portfolios to be listed. The regulator also allowed REITs to invest in two-level special purpose vehicle structure through holding companies (holdcos), subject to sufficient shareholding in the holdco and the underlying SPV and other safeguards.

Apart from listing through REITs, large funds are also diversifying into retail due to shortage of good quality office space in top cities. "There is a significant interest in rental income generating properties (core assets) from several blue chip institutional investors who have raised or allocated capital for this purpose. Retail is a good diversification (from office assets) as there is now sufficient operating track record for major malls across key cities in India," said Gaurav Kumar, managing director, capital markets, CBRE South Asia.

According to real estate consultant Cushman & Wakefield, the first half of 2016 witnessed the highest annual PE investments in retail with more than Rs 3,350 crore being invested, compared with just Rs 250 crore in the same period last year and the highest since 2008. The share of retail sector assets in cumulative PE investments in India has increased to 18% in H1 2016 from 2% a year earlier.

"The Indian retailmarket appears to have bottomed out from its slack and is expected to grow in the coming years. Factors such as positive economic outlook and large market potential continue to attract retailers to India," said Anshul Jain, the India managing director at Cushman & Wakefield. Some of the large transactions concluded in the first two quarters of 2016 included Singapore based GIC investing Rs 1,000 crore in Sheth Developers' Viviana mall in Thane, the Blackstone Group buying L&T's Seawoods Grand Central in Navi Mumbai for Rs 1,450 crore and Nambi Buildwell's Rs 904 crore acquisition of DLF Place Saket mall.

Mall developer Phoenix group is in talks with CPPIB to form a $300 million joint platform to buy land and develop malls across major cities. They plan to bring Phoenix's mall projects too to the platform and are in the process to buy out investors in some of the existing properties.

"Occupancy levels in malls are inching upward with steady rentals indicating that consumption is on the rise. With enhanced macro factors, retail is bound to perform better and this provides income flow to malls. Our interest in this segment is increasing due to these factors and we will continue to look for more opportunities," said a senior executive at an international fund, who did not want to be named.

According to Cushman & Wakefield, new mall supply increased to 4.8 million sq ft in the first half of 2016 from a mere 0.2 msf in H12015. This is the highest half-yearly supply in five years. Total new supply of about 13 msf across top eight cities is scheduled for completion by the end of 2018. More than 46% of this upcoming supply is located in Bengaluru and Chennai. With rising demand and declining new supply, the vacancy rates are expected to taper over the next one to two years, creating a more balanced equation between demand and supply.